CHOCOLATE IS THE WINNER FOR BEST TRADE OF 2018

Prices are boosted by the short supply as
the dry weather in top producers such as Ivory Coast hurt cocoa production.

The higher cost of cocoa has put pressure
on candy companies this year.

Looking back on a
tumultuous year where the majority of asset classes were deep in the red, cocoa
futures turned out to be one sweet spot.

In fact, a look at the top year-to-date performers among
major futures markets reveals that cocoa has returned a whopping 28 percent
this year. (The only trade that did better were complicated bets in volatility
futures, which gain in value along with the Cboe Volatility Index. Volatility
is not a pure asset class like a commodity or other security.)

While the stock
market and other risk assets were battered this year on fears of slowing global
growth and trade battles, cocoa prices enjoyed a surge because of short supply
as the dry weather in top producing areas such as Ivory Coast hurt production.

“The main crop harvest is continuing in West Africa.
Conditions are hot and dry. Main crop production ideas for Ivory Coast and
Ghana are being reduced, with Ivory Coast now estimating its main crop production
at 1.985 million tons, down from previous estimates just over 2.0 million
tons,” said Jack Scoville, senior softs analyst at Chicago’s Price Futures
Group, in a note on Friday.

“Conditions
appear good in East Africa and Asia. Demand is said to be improving as offers
from the new harvest start to increase,” Scoville added.

The higher cost of cocoa, which is used to make
chocolate, has put pressure on candy companies this year. The Hershey Co. and Tootsie
Roll Industries have both lost about 6 percent in 2018, while Nestle is
set to finish the year flat.

“We had some commodity and packaging headwind of
about 20 basis points in the first half,” Francois-Xavier Roger, Nestle’s
chief financial officer, said on an earnings call in July. The company’s
“cost savings were partially offset by higher commodity and packaging
costs. In 2019 and 2020, I’m more
encouraged by some of the internal projects we have underway to reduce our
commodity costs.”

Other than trading futures, investors could have also
accessed the winning commodity through the iPath Bloomberg Cocoa SubTR ETN,
which has gained 22 percent this year.

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